In this opinion article, energy policy specialist Andreas Klees highlights the ongoing legal and policy constraints to South African municipalities procuring electricity directly from independent power producers (IPPs). Nevertheless, he urges them to begin preparing themselves for that eventuality.

In 2015, the City of Cape Town sought approval from then Minister of Energy, Tina Joemat-Pettersson, to procure solar and wind energy from IPPs. As neither the Minister nor her successors acceded to the request, the City approached the courts. Judgment has been reserved and the implications are potentially significant.

What is it about? According to s7(1) of the Electricity Regulation Act 4 of 2006 (ERA), no generation facility must be operated without a generation licence issued by the National Energy Regulator of South Africa (Nersa), apart from some exemptions as stipulated in (the recently amended) Schedule 2. Nersa insisted that, in order to issue a licence to an IPP which intends to establish new generation capacity, either a s34 determination or ministerial approval in terms of s10(2)(g) of the ERA would be required. This interpretation was always debatable. According to s10(2)(g), the applicant must provide ‘evidence of compliance with any integrated resource plan [notably not a ministerial determination] applicable at that point in time or (…) reasons for any deviation for the approval of the Minister’.

Hence, one could argue that no Ministerial blessing is required to obtain a generation licence when the IPP can demonstrate that the plant ‘fits into the plan’. It is also noteworthy that the draft Electricity Regulation Second Amendment bill (GG 34870 of 19 December 2011) sought to replace s10(2)(g) with a much stricter framework, including a new clause 34(4) which stated: ‘No new generation capacity may be established or procured otherwise than pursuant to and in accordance with a determination made by the Minister in terms of this section’ (see also clause 13A ‘Ministerial Approval’). Even though the draft bill never became law, NERSA and the Minister seem to read these proposed provisions into the existing Act.

In a rapidly changing electricity sector that is shifting from large-scale conventional power plants to low-carbon distributed generation, it makes sense for municipalities to play (again) a more prominent role in the generation space. Recent and forthcoming Eskom tariff increases will spur the trend to ‘behind the meter’ installations and the ‘culture of non-payment’ for services provided. The re-emergence of rolling blackouts has put additional pressure on municipalities. Consequently, the ‘business model’ for municipalities of buying electricity from Eskom and selling it on to its customers has come under scrutiny. For municipalities to look for cheaper energy sources becomes a question of staying financially sustainable.

While many municipalities will not be willing or able to contract with IPPs, those that could, should not be prevented from doing so from the outset. Other safeguards (e.g. s33 of the Municipal Finance Management Act) are in place but should be looked at separately, if necessary. On the other hand, it can hardly be denied that there is a need for the orderly development of the electricity sector as a whole and for a coordinated approach to implement the Integrated Resource Plan (IRP). This should not be a contradiction, provided the green economy and carbon emission reduction targets of municipalities are adequately reflected in the national plans for the energy sector.

What comes next? There is a good chance that eventually the Constitutional Court may have to decide what municipalities can and cannot do in the generation space. While this will provide legal certainty, it is likely to further delay municipal IPP procurement.

The debate took a surprising turn when President Cyril Ramaphosa announced in his 2020 State of the Nation Address that government ‘will also put in place measures to enable municipalities in good financial standing to procure their own power from IPPs’. The Minister of Mineral Resources and Energy published draft amendments (GG 43277 of 5 May 2020) to the Regulations on New Generation Capacity (NewGenRegs) for comment that would ‘permit a municipality [in sound financial standing] to apply to the Minister to establish new generation capacity’.

While the City has already indicated that this falls short from a municipal perspective, it is nonetheless a positive development. It would mark the official end of the single buyer model in South Africa with the cash-strapped utility Eskom as the sole off-taker of power from new generation capacity established by IPPs. To allow qualifying municipalities to choose their supplier for a portion of their power requirements would also foster competition in the electricity sector. The need for increased competition in the generation sector was highlighted in the National Development Plan and more recently in the 2019 ‘Roadmap for Eskom in a Reformed Electricity Supply Industry’. The ERA supports this as well, at least in principle, as one of its objects is to ‘promote competitiveness and customer and end user choice’.

The two determinations that were sent to Nersa for concurrence earlier this year still conform to the traditional way of procuring power from IPPs, with the DMRE as the procurer and Eskom as the (sole) buyer. This would have to change. There is also increasing appetite from corporates to procure power from IPPs. With more potential players, more flexibility is required how the IRP is implemented. Non-discriminatory access to the grid for all generators and a functioning wheeling mechanism, including cost transparency for wheeling charges, are also prerequisites for willing buyer, willing seller arrangements.

Even if the draft amendments to the NewGenRegs were to be adopted any time soon, significant preparatory work, including ‘detailed feasibility studies’, must be undertaken before municipalities can apply for a s34 determination and embark on competitive IPP procurement. Irrespective of what the outcome of the case between the City of Cape Town and Nersa/the Minister of Mineral Resources and Energy will be and whether we will see an evolution or a revolution of the way new generation capacity is procured in South Africa, municipalities that are interested in procuring power directly from IPPs should get ready.

Klees is a German qualified lawyer with over 18 years’ experience in energy policy, law and regulation; a former professor of law, holding a doctorate in law from the University of Hanover, Germany, a Master of Laws and a Bachelor of Commerce in Law from the University of South Africa as well as a Graduate Diploma in Economics from the University of London; and author of the book ‘Electricity Law in South Africa’ (Juta, 2014) – contact@electricitylaw.co.za